Industry Trends Don't Frighten Minority Banker

By William H. JonesOctober 5, 1981

Washingtonian Samuel I. Foggie Sr. has looked at the promised new land of financial supermarkets and concluded that there always will be a place for the neighborhood store -- especially when that little shop offers thoroughly modern goods for sale at competitive prices and is able to take advantage of new technology in monitoring all transactions.

Foggie is a banker, but unlike many of his colleagues at small and medium-sized institutions around the country, he is not overly concerned that National Steel, Merrill Lynch or Sears, Roebuck will put him out of business as they gear up to offer banking services.

He also pointed out that a race track in Kentucky offers 5 1/4 percent for each $50 deposit that is left at the track prior to when it is bet.

Addressing the 54th annual convention here of the National Bankers Association, for which he served during the past year as president, Foggie noted that the Japanese have one word with two meanings -- defeat and opportunity. He found this appropriate to banking: "There is logic to this, for these changing times will give us new opportunities to become better bankers."

As a black banker, president of the minority-owned United National Bank in D.C. and president of the minority bankers' trade association, Foggie might have been expected to devote his attention here to their special problems and needs.

Indeed, the key question on the minds of many black bankers at the convention was the Reagan Administration's plan for government deposits in minority banks -- a l0-year-old program given new impetus under President Carter. By mid-1980, federal government agencies had some $200 million on deposit regularly at the nation's minority banks, which number about 100.

This total is relatively constant every day but the amount of monies involved is billions of dollars on an annual basis, since the deposits normally are placed in a bank one day but taken out a few days later. This program has been an important source of deposit stability for the minority institutions and so there was shock for the bankers earlier this year when Reaganomics hit the U.S. Customs Service in New York. That agency conducted a free-enterprise style competitive bidding for a $5 million-a-day account that had been deposited on a rotating basis in the black-owned Freedom National Bank of New York and the New York office of Puerto Rico's Banco de Ponce.

Although Banco de Ponce won that bidding war with some major New York banks, there was real concern that the new administration would apply this policy across the board. On an annual basis, an estimated $1.5 billion flowed through the customs account alone.

But two spokesmen for the administration, first Housing and Urban Development Secretary Samuel Pearce (himself a founder of Freedom National) and then Vice President George Bush, sought to allay these fears in separate talks to the minority bankers.

"You should know that this administration intends to make sure that its agencies make a concerted effort to place government deposits in minority-owned institutions when feasible and consistent with sound cash management practices," Bush stated.

More to the point, for black bankers who wanted something more specific, the vice president added: "We have no current plan to open to competitive bid any accounts now handled by minority institutions beyond the one announced to date." To which Freedom National Executive Vice President Ronald Homer responded, "That's good news."

Similarly, a panel of top corporate officers from Fortune 500 companies conducted an extended dialog with the bankers over separate programs they have to channel deposits and banking business from establishment firms to the minority institutions. The general consensus was that the small banks have much to offer in terms of services that match money-center institutions and the corporate officials indicated they would put even more of their money to work in the bankers' communities with expanded deposits, loan participation and other financial services.

"If things had to be easy for black-owned banks to come into existence and to survive, there would not be a single one of us in this room today," Foggie observed.

But Foggie also sought to convince his colleagues that black bankers are really no different from their competitors, in terms of the new world. Minority institutions serve communities that often have had great difficulties in being treated adequately by the American banking industry and these relatively small banks channel mortgage funds, consumer loans and money for business to areas of the nation's cities that often are desperate for financial resources.

Still, Foggie's main emphasis here was on the overall state of his industry. In effect, he reminded the black bankers that they must be good bankers before they can achieve their more specialized goal of community service. And Foggie went much further than other small bankers around the country in embracing the new era.

For example, the big American Bankers Association which began its annual convention here as the National Bankers ended their sessions, is so divided that there is no consensus on such intriguing questions as whether banks should be permitted to open branches across state lines. This is so because the ABA represents thousands of small and big banks -- more than 90 percent of the 14,500 commercial banks that exist today. And many executives of smaller and medium-sized banks are not looking forward to finding branches of Citibank or Bank of America on the next corner.

Foggie's view is that Congress should "recognize that interstate banking exists, in fact, and it should be permitted to exist in law," through enactment of legislation that would allow banks to conduct all types of business on an interstate basis, at least regionally, much as they conduct commercial lending and consumer finance on an interstate basis today. He conceded that this change would not be without a sting:

"While interstate banking will permit banks like United National Bank to go into the lucrative markets of Northern Virginia and Maryland, it will also mean that I have to compete with those states' banks who will have the opportunity to come to the District of Columbia."

In addition to interstate banking, Foggie also called for the government to permit banks to offer money market funds in competition with the mutual fund industry.

Why is Foggie so determinedly optimistic in the face of new competition, the need for major investment in new technology and the burden of inflation on costs?

"That is because I know small banks like ours will adapt to this new environment and not just survive, but prosper," he stated. "How do I know that? Because small banks . . . have been living in the world we are now told is in the future, and, we are told, a future that does not include us."

Specificially, he cited research reports that show small banks have been able to maintain a good rate of deposit growth, and, contrary to many other industries, operating efficiencies do not increase in banking with increased size. Foggie recited a series of innovations that small bankers have employed, including sales incentive programs for loan officers at one small bank (including an all-expense vacation in Acapulco for the top performer), special emphasis on particular local industries and joint purchases of automatic teller machines to bring down the average cost per machine to the banks involved.

One newspaper in San Francisco wrote an obituary last week for small banks such as Foggie's, suggesting that when the ABA meets here again in about five years, there would be far fewer than 14,500 banks. That's "about 14,000 more than a sophisticated economy needs," wrote Donald White in the San Francisco Chronicle. Speaking with some of the black bankers, ABA President Lee Gunderson took issue with the newspaper suggestion. "I have news for Mr. White. . . I plan to come back here," said Gunderson, echoing the thoughts of Foggie on small banks. Gunderson, it should be noted, is president of Bank of Osceola in northwest Wisconsin, an institution with about $16 million of deposits; that is about one-third the size of Foggie's United National in D.C.

Foggie was succeeded as president of the National Bankers by I. Owen Funderburg, president of the Citizens Trust Bank of Atlanta, the site of next year's bankers' convention. Whatever the legislation that Congress approves before then appears unlikely to cause a wholesale elimination of America's small banks.

But five years from now, the number of small banks is likely to be reduced substantially. Foggie's message could be that the survivors must know now what they are going to be doing if they don't want to become a branch of another institution.